Making L.A. Affordable
A form of co-ownership called the tenancy in common is picking up steam in California cities — most recently, in Los Angeles, where a company named B&A Group LLC is overhauling single-home properties so they become multi-unit townhomes.
Each buyer receives a share of ownership in a townhome, with the exclusive rights over one section of the building. The co-owners pay monthly dues to a homeowners’ association to cover maintenance costs.
A set of new California “upzoning” laws has made this model possible in more areas, so we’re expecting the trend to take off. What’s to like — and what’s not to like — about the tenants in common model?
The Great Potential of Tenancy-in-Common Developments
B&A began creating its new townhomes in California even before S.B. 9, the zoning law that lets an owner of a single-unit property split the parcel into multiple housing units. Increasing housing supply and promoting (relative) affordability are the model’s major advantages. Cities like San Francisco and L.A. are expensive. Plenty of renters are fatigued from years of paying $3,000 a month for one-bedroom, downtown apartments. They’ve lived their lives and worked for years in these cities, but haven’t been able to buy their own properties. Many have a strong desire to finally build equity in their own homes.
And now, they might look to B&A’s three-bedroom townhomes with their gardens or rooftop decks. Granted, B&A’s shared title model is not for everyone. Thus, these townhouses — even with their new construction — have been selling for a lower price than the typical condos and townhomes. “Lower” in California means a three-bedroom unit from B&A goes for $750K to $850K. The typical three-bedroom condo in L.A. would now go for more than a million dollars.
The Core Criticisms of Tenancy-in-Common Developments
Some loan products might not be available for tenants-in-common ownership, so buyers need to consult with mortgage specialists to understand their financing options.
On a more general level, a key concern focuses on developers’ activities. What’s stopping developers, beyond B&A, from pressing owners of modest homes to sell to them? As investors get into the model, will they be pushing real estate prices up and displacing the least advantaged residents in the areas they buy into? Will they start incentivizing low-income homeowners to sell, and then remake and sell those properties for hefty gains? Already, lower-income and minority homeowners have faced enough pressure.
B&A admits the model is profitable. L.A. real estate companies can adopt it to sell townhomes and come out ahead of companies that sell whole properties to landlords. Plus, the tenancy in common saves the builders’ time by shaving off the bureaucracy that comes with selling individual units. (California case law prevents cities from regulating tenancies in common. The legal logic? People have a right to freely share ownership of real estate.)
For now, although B&A is certainly profiting, the company points out that it’s spending a lot to transform old buildings into new townhomes, and then selling these at a relative discount (10-20% less than the typical price for a three bedroom in the areas). And B&A’s agent points to a number of first-time home buyers who have in fact bought in as tenants in common.
Densify It Yourself? Tips for Creating a Tenancy in Common
To beat the heat of urban and suburban real estate markets, friends are getting together and pooling their funds. For a successful tenancy in common (TIC) arrangement, it’s vital to have the input of an attorney who’s familiar with local laws. A good written agreement can avert legal and financial blunders. The agreement should speak to the following questions:
- What percentage of ownership will each co-owner hold? This will be memorialized on the deed.
- How will utilities and maintenance — indoors and outdoors, routine and emergency, major and minor — be approved and paid for? Co-owners need to establish a minimum reserve fund for this purpose, and to potentially cover big-ticket items like insulation, drainage work, roof replacement, and structural repairs.
- What will occur if one person quits upholding their end of the bargain?
- What will happen if there are other disagreements on shared elements of the building, such as landscaping or gardening decisions, power sources, noise levels, visitors, and so forth?
- Will pets be allowed? If so, what are the limits? To some extent this decision will need to follow state law.
- What happens to the title if one co-owner dies? Now is a good time for the co-owners to update their wills.
☛ No homeowner should die intestate. In plain English: Every homeowner needs a will.
Potential tenants in common should consult with a lawyer who can guide them through the drafting process, and discuss a range of possible issues. Then, they should all sign the document with a notary and witnesses. Each potential co-owner should have the document reviewed by a personal lawyer who has a duty to advise the individual client.
Selling the Property: When Co-Owners Go Their Separate Ways
A tenancy in common is a form of vesting real estate ownership. Unlike the joint tenancy with rights of survivorship, tenancies in common allow for co-owners to sell their shares to new co-owners. They can do this in their own time, each on an individual basis. And, generally, they can also secure loans against their ownership shares. They can use and dispose of their share in the property without any need for the co-owner’s permission.
What can’t a co-owner do as a tenant in common? The co-owner can’t sell the whole property without the other owners’ agreement that they will all sell. So they have to all agree to sell and divide the proceeds, or one would leave the co-ownership at a time. Any time a tenant in common leaves and another comes in, the present co-owners conveys a deed to the newly formed group. The original agreement stays in force.
They may put language in their agreement giving the others a right of first refusal when a co-owner wants out. Buyouts of this type must be done on the basis of fair market value, and in the agreement’s stipulated time period. Otherwise, the one who wants out will be able to sell on the open market.
What about taxation? An owner who makes a profit on the sale of their share has to pay tax on capital gains, but a taxpayer can exclude up to $250,000 from taxation by meeting the basic IRS rules.
As Society Evolves, So Does Real Estate
Once upon a time, most co-owners were spouses or close relatives. Today, a growing number of co-buyers are unrelated people. Given the high cost of housing, the case is even stronger for unrelated people to join forces as tenants in common.
Insofar as the TIC model puts homeownership within more people’s reach, it’s a positive thing. Real estate is considered a good investment by most people. And as tenants in common, buyers can approach the market with a relatively affordable strategy.
Supporting References
Andrew Khouri (with Ben Poston and Thomas Suh Lauder) for the Los Angeles Times: A Controversial Home-Ownership Model Is Gaining Steam Again in L.A. — With a Twist (Feb. 8, 2022).
Deeds.com:Owning Property in Unequal Shares, as Tenants in Common (Jul. 16, 2020).
And as linked.
Photo credits: Roberto Nickson and Ana Arantes, via Pexels.